First Circuit Case on Relevant Conduct and Conditions of Supervised Release.

In United States v. Thomas, ___ F.3d ___, (1st Cir. 2011), the defendant had a long history of failure to file, failure to pay, and various acts of tax obstruction during the period. For years, the Government tried to work with him to get him into compliance, but finally gave up and brought criminal charges for six counts of evasion of assessment. That led to a lengthy saga in the district court, which the district court characterized as the most "difficult" case it had ever managed. The defendant finally pled guilty to a single count of evasion of assessment and the other counts were dismissed. The district court imposed a sentence of 24 months' imprisonment. The court also imposed restitution for the plea year (presumably pursuant to the plea agreement, since restitution is not allowed for tax crimes). On appeal, the defendant complained only about the district court's inclusion in the tax loss calculation of penalties and interest for nonplea years which drove his Base Offense Level up substantially and the district court's requirement that the defendant file delinquent returns and pay back taxes as a condition of his eventual supervised release. I cover those items briefly.
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Judge Smells a Rat in Government's Use of Tax Loss Presumption for Restitution

The tax loss is the principal determinant in tax Guidelines sentencing calculations. The Guidelines "contemplate that the court will simply make a reasonable estimate based on the available facts." SG 2T1.1, Application Note 1. Where the tax loss is not "reasonably ascertainable," the sentencing court may use certain "presumptions" to estimate the tax loss "unless the government or defense provides sufficient information for a more accurate assessment of the tax loss." Id. And, SG 2T1.1(c)(2)(A) provides that "If the offense involved failure to file a tax return, the tax loss shall be treated as equal to 20% of the gross income * * * less any tax withheld or otherwise paid, unless a more accurate determination of the tax loss can be made."

Restitution is a different concept designed to make the victim of the crime whole. Although, in tax cases, the tax loss and the restitution amount is often -- perhaps usually -- the same, it is not necessarily the same because the tax loss can, in some cases, include tax loss the defendant intended but never realized whereas restitution is allowed only for the realized tax loss.
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Avoiding the Stipulations in a Plea Agreement for Purposes of Sentencing

In United States v. Gillen, 2011 U.S. Dist. LEXIS 12606 (WD PA 2/9/11), the defendant entered a plea agreement in which he stipulated to the tax loss involved for purposes of the Guidelines Offense level in S.G. 2T1.1 and 2T1.4 (Tax Table). This is all routine stuff. Prior to sentencing, however, the defendant notified the Government that he would attempt at sentencing to prove a lower tax loss. The Government cried foul and move to enforce the stipulation.

The district court agreed that the defendant's attempt to avoid his stipulation for purposes of the Guidelines calculation would be foul. But, the court reasoned, the Guidelines are just advisory and the court has an obligation to determine a fair sentence under 18 USC § 3553(a). The plea agreement did permit the defendant to urge a variance under 18 USC § 3553(a). So, the district court concluded (footnote omitted):
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New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction)

Tax crimes afficionados know that restitution is not available for a Title 26 tax crime of conviction but is available if the crime of conviction, although related to tax, is under Title 18 (often the Klein conspiracy or even a conspiracy to commit a tax offense). The exceptions for Title 26 crimes of conviction permit restitution: (i) if the defendant agrees to restitution in a plea agreement; or (ii) if the court imposes restitution as a condition of some benefit given the defendant (e.g., probation). Even when permitted, restitution has been just an order of the court which is not self-executing and requires some collection efforts by the Government unless the defendant pays voluntarily which most defendants will pay before sentencing if they can in order to get the extra juice in for the judge's sentencing discretion.

Tax crimes afficionados also know that the reason restitution is not generally available for tax crimes under Title 26 is that the IRS has elaborate civil mechanisms to collect taxes, which is after all (at least in the criminal amount) the basis for restitution in criminal tax cases (whether under Title 26 or Title 18). From a civil perspective, most taxes involved in tax crimes are subject to the notice of deficiency requirement, permitting a taxpayer to contest in the Tax Court before the IRS actually assesses the tax and can deploy its collection mechanisms. Since the notice of deficiency is generally issued after the criminal tax case is finally closed, the notice of deficiency and Tax Court procedures with the prohibition on assessment often meant that the taxes reflected in the order of restitution were not assessed for years and the collection mechanisms in the Code were postponed for years.

Congress recently enacted a statute to make collection restitution for unpaid tax more efficient. Section 3(a) of P.L. 111-237, effective for restitution orders entered after August 16, 2010, amends Title 26 as follows (§ references are to Title 26 as amended):
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Walter Anderson -- The Fight Continues

The Walter Anderson saga continues with a decision by the Court of Appeals for the District of Columbia Circuit United States v. Anderson, 2011 U.S. App. LEXIS 1651 (D.C. Cir. 1/25/11). Those wanting some discussion of the saga might do a Google search; my quick search turned up thousands of items, including the following two: the Wikipedia entry here and the JusticeforWalt entry here. (Those wanting a less biased discussion might focus on the Wikipedia entry.) For present context, his case was one of the largest tax crimes case (in terms of tax loss) ever, and perhaps the largest individual tax crimes case. (Some of the marketed tax shelter criminal cases involved more tax loss because more taxpayers were involved.)

At any rate, the new decision arises from his prior conviction. The conviction was affirmed but remanded. United States v. Anderson,543 F.3d 1072 (D.C. Cir. 2008). In part here relevant, the earlier opinion permitted plea agreement restitution even though (i) the plea agreement cited the wrong Title 18 section, a phenomenon the Government urged and the court held was a scrivener’s error that did not vitiate the parties’ meeting of the minds to agree to restitution; and (ii) the plea agreement did not state an amount for restitution.

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Sentencing Case on Emphasis on Restitution Rather than Incarceration in Financial Crimes Cases

In United States v. Ciccolini, 2010 U.S. Dist. LEXIS 120292 (N.D. OH 11/11/10), a sentencing opinion, the defendant pled guilty to two felony counts -- 1 each of structuring transactions and tax perjury (Section 7206(1)). The defendant, a 68 year old ordained priest, embezzled substantial monies from a residential drug and rehabilitation center. The following are some key points of the decision:

1. The counts were grouped under S.G. 3D1.4. The structuring count produced that highest offense level (22), so 4 levels were added for the tax count, producing an offense level of 26, The offense level of 26 produced a Guidelines sentencing range of 63 - 87 months incarceration.

2. In reaching the offense level of 26, the court rejected an acceptance of responsibility downward adjustment. Although Ciccolini pled guilty, he equivocated about his guilt and some elements (amounts involved, etc.).

3. The Court then moved to a consideration which it labeled "3553(a) Factors and Payment of Restitution." Under Booker and progeny, the Guidelines calculation of a sentencing range is only advisory. The court noted that the defendant had repaid the charity the $1,288,263 he admitted embezzling (although the court noted earlier in the opinion that he had embezzled substantially more) and that he had made substantial payments toward the tax liability. Nevertheless, the Court moved to a philosophical discussion of the interplay between sentencing and restitution in financial crime cases, reasoning:

In crafting a punishment [*27] that will most adequately deter similar conduct by other individuals in the future, the Court is influenced by the writings of Nobel Prize winning economist Gary Becker. In his seminal article on crime and punishment, 4 Professor Becker recommends more emphasis on fines — and less on incarceration — for many white-collar or financial offenses. Becker theorizes that in financial crimes the incarceration of the specific offender is less important than providing a disincentive to future offenders through financial penalties. The Court generally agrees with these propositions and finds them persuasive here. See United States v. Turner, 998 F.2d 534, 535 (7th Cir. 1993) (agreeing with Becker's theory that fines are often an effective means of increasing deterrence). With Becker's theory in mind, the Court finds that imposing a financial penalty in the current case, rather than prison time, will adequately deter future financial crime.
FOOTNOTE
n4 Gary Becker, Crime and Punishment: An Economic Approach, in Essays in the Economics of Crime and Punishment 1, 24-34 (Gary S. Becker & William M. Landes, eds., 1974).

On this reasoning, the court determined that restitution was rather than incarceration was appropriate in this case. The money had been stolen from the charity which was not directly harmed by the offenses charged -- structuring and tax offenses. The charity was hurt by the uncharged conduct of embezzlement. The court held that Section 3663(a)'s definition of victim of the crime permitted the sentencing court to order restitution for the closely related uncharged crime of embezzlement. The court held:

The Court finds that this case law — particularly Carpenter -- allows for a restitution order that takes the Defendant's entire criminal conduct into account where non-charged conduct is closely related to the charged conduct. Thus, as part of its sentence, the Court orders that the Defendant pay restitution to the Interval Brotherhood Home Foundation in the sum of $3,500,000. Although this is a cautious estimate and likely understates the amount embezzled, the sum is a significant portion of the money that was embezzled by the time the offense conduct occurred in 2003 and 2004. The Court concedes that this restitution order is somewhat unusual. Both Carpenter and Jewett deal with situations where a defendant was charged with fraud and a restitution order was issued covering conduct not itself charged, but that was part of the same fraudulent scheme. Here, the money that was stolen from the foundation is somewhat less related to the charged offenses of structuring financial transactions and tax evasion. However, the Court views the rationale underlying those decisions and Congress's amendment of § 3663 as supporting an order of restitution. The charged offense conduct here was designed to conceal and support the broader scheme of embezzlement and can fairly be viewed as part of the same offense conduct.

The Court finds that imposing a restitution order serves the dual purpose of general deterrence under § 3553(a)(2) — i.e. imposing a monetary fine for a financial crime — and also serves the purpose of providing restitution to the victims of the offense conduct under 18 U.S.C. § 3553(a)(7). Thus, the Court views a significant fine together with a restitution order, rather than prison time, as the most effective and just punishment in this case.

Tax crimes are, of course, financial crimes.  I don't have enough information to know whether this sentencing opinion is an outlier or representative of a trend.  I would appreciate the views of readers with a better observation point.

Restitution in the Coplan Tax Shelter Enabler Case

In United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS), the Government wanted to prove the restitution amount through the closing agreements with the taxpayers involved. (Note in regard to restitution that, although restitution is normally not available in tax cases, the defendants were convicted of the Klein / defraud conspiracy, which is a Title 18 offense permitting restitution.) Since the taxpayers involved had paid the tax agreed upon in the closing agreement, the restitution amount was the difference between the supposedly correct tax and the amount the IRS agreed to take to induce the taxpayers to settle.  Here's how the judge responded (Transcript pp. 7-8 (for full transcript see here)):

I believe it is the first section I read that is operative here, that is, 18 U.S.C. 3663A(c)(3), but both sections are essentially saying the same thing. And I am making the requisite findings under each that it is clear that determining complex issues of fact related to the cause or the amount of the IRS's losses here would substantially prolong the sentencing process to a degree that the need to provide restitution to the IRS is outweighed by the burden on the sentencing process. And, similarly, I determine that the complication and prolongation of the sentencing process that would result from fashioning an order of restitution here outweighs the need to provide restitution to the IRS.

That's especially true here. It is extremely difficult to figure out on a taxpayer-by-taxpayer basis exactly what the specific loss to the IRS is. As we discussed with only one taxpayer, I think it was back in November when we had the argument on the common issues, it's very difficult to figure out the specific loss. The closing agreements here with the taxpayers are quite complicated. Under the closing agreements individual taxpayers were able to keep part of the loss, and then the taxpayer also had to recognize a certain amount of income. There was a reallocation by the IRS in the example that we looked at of short-term and long-term gain, which in turn had implications for the following tax year. So there was recharacterization of various income/loss items over the next tax year. It would be far too great a burden on the process to try to fashion that order of restitution.

In addition, the government here is seeking restitution in hundreds of millions of dollars, and to impose restitution in addition to the other aspects of the judgments that I am going to direct be entered here would truly be unnecessarily punitive. So my conclusion is I am not imposing restitution on any of the four defendants for the reasons stated.

I have three observations here. 

1.  I understand that there was a legal issue lurking in the Government's attempt to use the closing agreements as it did.  An argument can be made based on the closing agreement statute that, once a closing agreement is reached, the amount in the closing agreement is the correct tax.  The tax is what the closing agreement says it is and, accordingly, there is no unpaid amount for restitution purposes.  The court's resolution by punting avoided having to deal with this issue.  (The same argument cannot be made for purposes of the tax loss calculation because even if the agreed upon amounts were the amounts that were the intended object of the crime and the settlements could be anticipated, the amount agreed upon in the closing agreements still pumped the intended tax loss up to the highest Base Offense Level.)

2.  As noted in an earlier blog, the jury was tasked to find a substantial tax due, although it was not required to come up with a number. As I also noted in that blog, the Government's case rested upon it, in effect, proving that each of the taxpayers involved committed tax fraud. If there had been a sentencing proceeding for each of those taxpayers, I have little doubt that a court would have been up to the task of coming up with a proper amount for restitution (although the defendant probably would have negotiated contractual contractual restitution in the plea agreement). I think the problem was that the Government attempted to short-circuit the proof required by a preponderance of the evidence with closing agreements signed by an out of court party (the taxpayer) and precious little else. Certainly, there may be an inference that the amount in the closing agreement is correct (perhaps as a minimum), but whether that inference alone should be relied upon for important criminal consequences -- whether the burden is preponderance, clear and convincing, or beyond a reasonable doubt -- is quite another matter. At least, that's my story and I am sticking to it (until corrected).

3.  In any event the amount of restitution sought by the Government was probably moot anyway.

Tax Court Decides that Restitution Payments Related to a Trade or Business are Deductible

In Cavaretta v. Commissioner, T.C. Memo. 2010-4, the Tax Court held that contractual restitution paid by a Dentist to an insurance company to compensate for overcharges are deductible as ordinary and necessary business expenses rather than losses. This resolution permitted the taxpayer (the Dentist) to carry the current year losses generated by the deduction of the restitution payments back to an earlier tax year to obtain a refund.

The holding is not a broad holding that restitution payments are ordinary and necessary business expenses or are always deductible in some manner under the Code. Let's address the holding in the context of the facts.

The taxpayer was a dentist. His wife worked in his dental office. His wife began charging an insurance company for services that were not rendered to the insured patients. Under the contract between the dentist and the insurance company, the dentist was obligated to repay overpayments for services rendered. The wife was prosecuted and pled to one count of health-care fraud. The husband contractually agreed to restitution with the insurance company, and the wife asserted that restitution in seeking leniency in the sentence. At sentencing, the judge referred to the contractual restitution commitment, but did not impose any fine or restitution.

The taxpayer / dentist, who had included the wrongful charges in income in the years he received it, then paid the restitution and sought to deduct it as an ordinary and necessary business expense. The key points in the Tax Court's holding that the restitution payments to the insurance company were ordinary income were:

1. The parties agreed that the payments were deductible. The taxpayer argued they were deductible as ordinary and necessary business expenses, thus permitting carryback to an earlier year. The IRS argued that they were section 165(c)(1) losses incurred in a trade or business which could not be carried back. (Note that this key nexus between the trade or business and the payment or loss often is not present; most prominently in the context of federal tax crimes, although restitution to the IRS in tax cases is not permitted, plea agreements often contain contractual restitution to the IRS (and, of course, is a count of conviction is outside Title 26, court imposed restitution to the IRS may be permitted); there is usually, however, no nexus between the restitution payments and a trade or business.)

2. The payments were, in fact, restitution although the sentencing court did not award restitution.  The court thus would appear likely to reach the same result with court imposed restitution.  Note that, since the offense was not a tax offense and the victim had been defrauded, the court could have incorporated the agreement into a court ordered restitution.

3. Restitution payments with the required nexus to a trade or business are deductible. Often when a defendant defrauds another, it may not be in connection with a trade or business. For example, an embezzler is usually not considered to be in a trade or business, and thus restitution of embezzlement proceeds would not be a trade or business expense. (Thus, the wife could not have claimed the expenses as ordinary and necessary expenses related to her fraudulent conduct of overcharging; but the taxpayer / dentist could claim them as related to his trade or business of a dental practice.)

4. The court distinguished cases which held that payments that are punitive might be nondeductible as business expenses under § 162(f). The court noted most immediately that these particular restitution payments were not punitive but compensatory. ("[W]we have little trouble concluding that the payments are noncriminal, compensatory restitution.") The court reached this conclusion without necessarily relying on the taxpayer's contractual commitment to repay in the operative agreements with the insurance company over the period of the false charges. They still had the required nexus to the taxpayer's trade or business.

5. Finally, the court held that, given the novelty of the particular issue in the context presented and uncertainty in the law, even if the court were wrong in the ordinary and necessary business expense holding, it would not impose an accuracy related negligence penalty.

So, that is the guts of the opinion.

My comments are:

1. From a technical tax perspective, I would have thought that the concepts of Arrowsmith v. Commissioner, 344 U.S. 6 (1952) and its progeny might have played some role in the court's exegesis. In very broad strokes, the holding of Arrowsmith and its progeny is that expenses related to income take on the character of the income. The Arrowsmith fight is often about whether the character of the expense is ordinary or capital, but I am not aware that those concepts cannot be used in further characterizing the nature of the ordinary expense. That type of inquiry seems to the what the court actually did without citing Arrowsmith and its progeny. The related income here was clearly trade or business ordinary income and, at a gut level, denying a trade or business offsetting loss (albeit in a later year) just does not strike the gut -- at least my gut -- as wrong. Apparently, it did not strike Judge Holmes' gut as wrong either.

2. The court discussed an earlier case, Stephens v. Commissioner, 905 F.2d 667 (2d Cir. 1990), distinguishing between punitive and compensatory restitution. I had generally thought that restitution is compensatory rather than punitive even when imposed at sentencing.  I did a quick LEXIS-NEXIS search and located perhaps some differences, which I think may be semantical, over this the distinction between punitive and compensatory restitution. See United States v. Leahy, 438 F.3d 328, 334 (3d Cir. 2006) (citing the opposing holdings on the issue, which I think may be reconciled by context; it just goes to show that what appear to be sweeping holdings in cases need to be filtered through the context in which they are made); see also Brian Kleinhaus, Serving Two Masters: Evaluating the Criminal or Civil Nature of the VWPA and MVRA Through the Lens of the ex Post Facto Clause, the Abatement Doctrine, and the Sixth Amendment, 73 Fordham L. Rev. 2711 (2005) (arguing for a general rule that restitution is criminal in nature, but again I think that a more refined approach evidenced by Judge Holmes in Cavaretta gets the right tax result rather than glittering generalities about criminal v. civil or compensatory).

IRS Administrative Processing of Restitution Payments

A recent Program Manager Technical Assistance (PMTA 2009-122, here) addresses various issues on IRS processing of restitution payments to the underlying taxes, penalties and interest. Although not addressed in this PMTA, a sentencing court cannot order restitution for tax liabilities, penalties and interest unless the defendant contractually agrees to an award of restitution. In our district, the AUSAs insist on this contractual restitution in the plea for the year of conviction plus other years involving relevant conduct. These AUSAs claim that DOJ Tax mandates this contractual restitution, but I have noticed that restitution has not been provided for in many pleas I have seen from other districts, even in cases handled by DOJ Tax personnnel. In any event, if the court does award restitution for the underlying tax, penalties and interest, the PMTA tells the Service what to do with it.

You can read the PMTA, but here are the conclusions reached in the PMTA:

1. Restitution payments should be applied to the civil tax liabilities, including penalties and interest, for the year(s) involved in the criminal case. If an assessment for civil tax liabilities has not been made, the restitution payments should be held in the general fund until an assessment is made and then credited against the taxpayer's civil tax liabilities. When the restitution order does not specify how to apply payments, the Service has discretion to apply the payments to the applicable years in the order that best serves its interest.
2. The Service cannot take administrative collection action to collect the restitution ordered. The Department of Justice through its Financial Litigation Units is responsible for collection and enforcement of the restitution order. The Department of Justice may enforce a judgment imposing restitution in accordance with the practices and procedures for the enforcement of judgments under Federal and State law.
3. If the Service receives an undesignated voluntary payment or an involuntary payment for civil tax liabilities the Service may apply them in the order that best serves its interest. If some of the civil tax liabilities are for a year that was also involved in a criminal tax proceeding, the Service may decide that it is in its best interest to apply those payments first to the year(s) not involved in the criminal tax proceeding.
4. If the amount of the restitution has not been fully paid when the Service determines that the amount of the civil tax liabilities are less than the restitution, the government should notify the court and move that it make appropriate modifications to the order. If the restitution is fully paid, then the excess is an overpayment that can be applied against the taxpayer's other outstanding tax liabilities and any balance refunded, after a claim for refund is filed. If no claim for refund is filed within the applicable period of limitations, then the excess can be moved to the general fund.

Get in Line Brother #18c - McCarthy, the Financial Side and Bits and Pieces

This will be my last planned foray into the McCarthy indictment.

The Financial Side

1. Civil Taxes, Penalties and Interest. McCarthy agrees to pay the tax, interest and civil fraud penalty on the tax on "the net income on all funds held in foreign bank accounts" for calendar years 2003-2007. He had not yet filed his 2008 tax return, so presumably he will report that correctly and not be subject to any penalty. The amount of tax and thus resulting interest and fraud penalty is not stated, so this promise to pay apparently does permit him to contest the amount of tax on which interest and civil fraud penalty will be based. Note that this agreement assumes other foreign accounts used for tax evasion; by contrast, his sentencing factors are designed to consider only the UBS account disclosed by UBS. He further agrees to cooperate in making the appropriate calculations. The settlement is basically the same as the current voluntary disclosure initiative, except particpants in the initiative pay a 20% accuracy related penalty rather than the 75% fraud penalty.

2. FBAR Penalty. McCarthy agrees to a single FBAR penalty of 50% in the one identified UBS account for the highest amount year during the period from 2003-2008. Why are the other accounts left out of this penalty? He did after all admit willfulness in failing to file them. Note, however, that this settlement is consistent with the current voluntary disclosure initiative, except that the penalty for that single year is 50% rather than 20% as is offered in the voluntary initiative, but the 20% applies to all foreign accounts whereas McCarthy's deal is 50% of a single account. Real comparisons to the financial cost of the current iniative therefore cannot be made because the plea documents do not provide the necessary information.

Bits and Pieces

1. Grand jury matters. The defendant agrees to "give up any and all objections that could be asserted" to the IRS about the IRS recieving "materials or information obtained during the criminal investigation of this matter, include materials and information obtained through the grand jury process." I have blogged facets this issue here. So, I summarily note here, that the agreement is a recognition that these materials were not obtained in an IRS investigation because the IRS can share with other IRS components the fruits of its investigation without any such waiver from the defendant (or taxpayer). This agreement is really an attempt by the Government to end run FRCrP Rule 6(e) which imposes grand jury secrecy. The agreement seems to treat Rule 6(e) as a right that the person to whom the materials relate can waive. My understanding is that the rationale of Rule 6(e) sweeps broader than that and goes to the heart of the grand jury system to keep such matters secret until released in a proper way. The proper way grand jury material gets released is in the courtroom, a public forum, pursuant to a proper proceeding or by a Rule 6(e) order. Because of the plea agreement, there is no public proceeding in which all of these documents will be introduced and thus available to the IRS. (I suppose the IRS could force them into the public record in a sentencing hearing proceeding about the tax loss number and, perhaps, about the proper Section Two Part S calculations.) And, a Rule 6(e) order for the release to the IRS for civil tax purposes is expressly prohibited by Supreme Court authority. (I guess the IRS might be able to thread that needle by having the defendant agree to contractual restitution for these amounts and seeing if the court would have some type of public proceeding to permit it to dump the documents into the public record, but that would be too blatant an end-run around Rule 6(e).) I have had this genre of battle with an AUSA before who requested a similar waiver. I told him that my client would give it, but I did not think a waiver really solved his 6(e) problem. I think he agreed with my analysis because he then backed off the request and found another way to get around 6(e) -- by delivering all the documents back to the defendant whereupon the IRS had access to them through its usual processes. The solution may not be available in the McCarthy case because the documents are probably not the defendant's documents. The IRS would have to release them to UBS and whether or not UBS would then have an incentive -- either by compulsory process or otherwise -- to give them over to the IRS civil division is unknown. However, the agreement could have required McCarthy to request these documents from UBS and then turn them over to the IRS. The point I am making at too much length is that the Government simply solved the problem in the wrong way.

2. Restitution? The plea states that "Defendant understands that the Court may order defendant to pay any additional taxes, interest and penalties that defendant owes to the United States and may order defendant to pay any additional fines that defendant owes to the United States." Plea ¶ 5. The plea cites no authority for the taxes, penalties and interest reimbursement, and I am aware of no authority for it unless the defendant agrees to contractual restitution which would, then, permit court enforcement of the contract. In this regard, independent of contractual restitution, restitution is permitted only for the crime of conviction (tax crimes is not one, but the crime of conviction is not a tax crime). The crime of conviction is the failure to file an information report, and there is no dollar harm to the United States from failure to file an information report. Of course, the IRS does have the full array of tax determination, assessment and collection tools for any tax, interest and penalties.

Obama Legislative Proposal - Assessment of Restitution as Tax

I have previously blogged here a very brief summary of the President's tax related legislative agenda, presented in which is known as the "Greenbook" and is available here. I now discuss in more detail some of the proposals. Today, I discuss the following proposal (pp. 97-98 of the Greenbook):

ALLOW ASSESSMENT OF CRIMINAL RESTITUTION AS TAX

Current Law

In criminal tax cases, a District Court may issue an order requiring the defendant to pay restitution of existing tax liabilities. The District Court has authority to order restitution under the criminal provisions of Title 18, not the Internal Revenue Code (Code). Because the assessment procedures under the Code apply only to taxes imposed by the Code, those procedures do not apply to restitution orders issued under Title 18, even if the restitution order relates to an existing tax liability.

Reasons for Change

Because court-ordered restitution in criminal tax cases cannot be assessed as a tax, the IRS cannot use its existing assessment systems to collect and enforce the restitution obligation. This leads to unnecessary duplication of efforts, delays, and confusion in the administration of court-ordered restitution.

Proposal

The proposal would allow the IRS and the Treasury Department to immediately assess, without issuing a statutory notice of deficiency, and collect as a tax debt court-ordered restitution. The taxpayer would not be able to collaterally attack the amount of restitution ordered by the court, but would retain the ability to challenge the method of collection.

The proposal would be effective after December 31, 2010.

By way of background, and as noted in the cryptic statement of current law, restitution is not statutorily authorized for convictions of pure tax offenses. The reason is that the IRS has assessment and collection mechanisms for collecting taxes that are deemed quite effective for collecting taxes and hence Congress did not deem it appropriate to overlay the separate system for collecting restitution. Notwithstanding this general notion that restitution is not available in tax cases, many tax crimes are charged along with Title 18 offenses for which restitution is allowed. Thus, for example, the indictment in tax crimes often includes a defraud / Klein conspiracy (18 U.S.C. § 371) charge that is a separate crime under Title 18 and thus permits the Court to impose restitution. More importantly, the Department of Justice Tax Division requires that plea agreements contain a restitution provision for tax and some of the penalties regardless of whether, absent the plea agreement, the sentencing court could impose restitution. (For the DOJ Tax CTM discussion of Restitution in tax cases, see here., which among other things provides that the prosecutor cannot word the restitution agreement as a compromise of the underlying civil tax liability.) As best I understand DOJ Tax's policy decision to require restitution in tax cases, it is not to end-run the congressional judgment to not allow restitution in tax cases, but to force some monetary resolution in the criminal case in advance of the IRS using its collection enforcement tools.

Usually, the IRS is unable to marshall its collection enforcement tools right away because, most of the taxes involved in criminal cases, require a predicate notice of deficiency and then permit prepayment administrative review and litigation before the IRS can assess the tax. Assessment is the predicate act required to using the IRS enforcement tools. The proposal allows the immediate assessment of the amount of the restitution without any other applicable statutory or administrative predicates. Thus, the restitution amount can be assessed without a notice of deficiency and the remedies / delay opportunities it affords.

Of course, in many cases where restitution is agreed upon as part of the plea bargain, the defendant will have the incentive to fully pay the restitution amount in order to obtain sentencing benefits. The proposal thus affects only restitution amounts that are not paid at or before sentencing.

Finally, the proposal does not address the defendant upon whom restitution is not imposed. In tax cases, this could occur where the only crime(s) of conviction are tax crimes and the defendant does not agree to restitution or accept some benefit having a condition of restitution. The IRS will then have to issue a notice of deficiency for those taxes where one is required (income and estate and gift tax) and await the taxpayer's pursuit of administrative or judicial remedies before assessing. This will be true even if the sentencing court determines a tax loss number in the sentencing phase. (On a related topic, I have previously discussed here the application of collateral estoppel on the basis of events at the sentencing.)

Obama's Tax Proposals Relating to Tax Crimes

I have briefly reviewed the so-called "Greenbook," which is the common name for a tome titled "General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals" dated May 2009. Based on my limited review, here are the items that are most relevant to the general topic of federal tax crimes (including civil penalties that often accompany tax crimes). I present here the proposals themselves without discussion of the current law or reasons for the change. Most practitioners reading this blog will already know the current law and can easily imagine reasons for the change. Perhaps in subsequent blogs where I address the proposals in more detail. In this blog, however, I just alert practitioners to the proposals.

1. FBAR and Related Foreign Account Provisions

This blog's readers certainly know by now what the FBAR is, but as a reminder it is the form due by June 30 of each year with respect to foreign financial accounts over which a U.S. taxpayer had certain powers during the preceding year (the year for which the report is made). (For the FBAR form, click here and for IRS FAQs on the FBAR, click here.) Suffice it to say significant numbers of U.S. taxpayers do not comply with the FBAR requirement or answer properly the related questions on Form 1040 Schedule B about foreign bank accounts. Taxpayers failing to file the FBAR also often -- indeed generally -- do not pay U.S. tax (income or estate and gift tax with respect to such accounts). The IRS has a major enforcement initiative with respect to foreign accounts and these obligations for FBARs and income tax return reporting. The Obama proposal is to require U.S. individual taxpayers to disclose on their 1040s information paralleling the disclosures on the FBAR.

As a backup to the foregoing obligations, the Obama proposal will require U.S. financial intermediary firms to report (i) transfers with a value of more than $10,000 to a foreign bank, brokerage, or other financial account on behalf of a U.S. person and (ii) receipts with a value of more than $10,000 from a from a foreign bank, brokerage, or other financial account on behalf of a U.S. person. A U.S. financial intermediary that opens a foreign account for a U.S. person will be required to report regarding the account and transfers to the account. Treasury would be given regulatory authority to promulgate rules and exemptions.

A negative presumption will apply in civil cases that a person having a foreign account had the amount required to have an FBAR obligation. A related negative presumption would treat the taxpayer's failure to report foreign accounts with over $200,000 as willful, thus attracting the more draconian FBAR penalties unless the taxpayer rebuts the negative presumption. A related provision extends the statute of limitations for failure to report until 6 years after the taxpayer reports the information required to be reported.

The accuracy related penalty for failure to report income for accounts required to be reported would be doubled from 20% to 40%.

2. Tax Restitution

Restitution is not permitted (absent the defendant's agreement or in exchange for a benefit given by the sentencing court) for Title 26 (Internal Revenue Code) offenses. Restitution is permitted for tax flavored crimes charged under Title 18 (e.g., defraud conspiracy). But, the IRS has no authority to assess the amounts in the restitution obligation and thus cannot use its substantial collection powers with respect to such amounts because restitution amounts have not been assessed as a tax. The proposal is (i) to give the IRS authority to assess immediately the amount of the restitution (without a notice of deficiency) and (ii) to deny the defendant taxpayer the right to collaterally attack liability for the restitution as tax in a civil tax proceeding.

3. Make repeated Failure to File a Tax Felony.

A U.S. taxpayer failing to file for 3 out of 5 years involving an aggregate tax liability of $50,000 or more could be charged as a felony rather than the normal misdemeanor attaching to failure to file. This enhanced felony status would be called an aggravated failure to file. The maximum incarceration period would be five years and the maximum fine would be $250,000 ($500,000 in the case of a corporation).

4. Investigative disclosures

The proposal will give IRS agents authority to identify themselves, their organizational affiliation, and the nature and subject of an investigation, when contacting third parties in connection with a civil or criminal tax investigation.